solo 401k
Client is 40 yrs old and has a business selling real estate. Business is an LLC and he has no employees. We are considering a solo 401k since a goal would be to maximize contributions.
1) for purposes of company contributions I know he can do 25% . My question is 25% of what? Is it net income of LLC or what? Also I know there is a max.. is the max the 230,000 compensation limit and thus 25% of 230,000?
2) How will salary deferrals work? He has no salary just the pass thru earning of the LLC as afterall it is a passthru entity. So are salary deferrals allowed and if so how are the derived at ? ( I know max is 15,500) If he can do deferrals since we are at years end can he do 15,500 in one big chunk?
3) given max contributions are goal can anyone see a reason to not do a solo k but do a SEP instead?
Permalink Submitted by mk foss on Thu, 2008-12-11 05:45
The solo 401k may allow greater contributions if he makes less than the $230,000 compensation limit.
With an LLC because there is no salary the “employer contribution” portion will actually be 20% of the LLC income reduced by 50% of the SE tax.
Example: LLC profit $100,000 – before year end owner puts the $15,500 into the plan (which is not deducted in getting to the $100,000). The $100,000 is reduced by $7,650 (one half the SE tax on 100k) and 20% is applied. The $18,470 from the employer plus the $15,500 from the employee give a total contribution of $33,970.
With a SEP the maximum contribution would be the $18,470 calculated the same as in the previous paragraph.
The 25% figure is used for both types of plans when you have a corporation and are applying the factor to a salary. The 20% is 25% adjusted for deducting 25%.
Permalink Submitted by charles lore on Thu, 2008-12-11 13:56
This is very informative but just so I am clear .. even though there is no w2 wages, ie salary, he can do salary deferrals based on the k1 income?
Permalink Submitted by Martin Helmer on Thu, 2008-12-11 15:54
Yes, a partner in a partnership’s compensation for solo-k purposes is the net income from self employment off the Form k-1. Also, if the retirement plan document defines compensation to include the partner’s distributive share of net income, it can be used too.
But distributive share of net income cannot be used as compensation for a partner in an S-corp.